The Companies Bill

1
The Companies Bill

• Presentation to Portfolio Committee
• 16 March 2007

2
Scope

• To present policy context and high-level overview
  of Companies Bill
• Initial clarification and discussion of Bill

3
Rationale for Reform

• Need for holistic review of SA Company Law
• No substantial review of company law in 30years
  (only introduction of CC Act in 1984)
• International jurisdictions undergone substantial
  revisions
• Global and domestic environment changed
  significantly since 1970s
• Corporate structure and financial instruments
• Electronic communication, social awareness,
  changing markets
• Globalising markets, standards and expectations
• Corporate failures and scandals in SA and
  elsewhere highlighted governance issues
• Socio-political and economic change in SA
• Other laws Securities Services Act, Auditing
  Professions Act, BBBEE, PFMA, 2nd King Committee
  Report
• 1973 Companies Act outdated, highly formalistic,
  has unnecessarily burdensome information
  requirements, creditor-oriented and is overly
  criminal.

4
Policy context
Registered Entities Number Percentage ( registered)
Close Corporations 1,276,157 40.51 (75)
Private Companies 412,233 13.09 (24)
Public Companies 3,757 0.12 (0.2)
Incorporated Companies (Professional) 7,976 0.25 (0.5)
External Companies 1,056 0.03 (0.06)
Total Registered Entities 1,701,179 54
Unregistered Entities Number Percentage
Informal economy 749,500 23.8
Sole proprietorships 699 166 22.2
Total Enterprises in Economy 3,149,845 100
Of the 3757 public companies, only 440 are listed
entities. These companies account for 60 of GDP
99 of registered businesses are privately owned,
but not all are small or medium-sized
Aim of reform is to attract unregistered entities
into the formal economy
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Policy context

• High-level objectives are to
• Reduce regulatory burden for small and
  medium-sized firms (mostly owner-managed,
  privately owned)
• Enhance protection of investors through enhanced
  governance and accountability (esp. public
  interest companies), minority protection and
  shareholder recourse
• Create a more flexible environment, without
  comprising regulatory standards and objectives,
  to enhance investment

6
Guiding Principles

• Simplification
• The law should provide for a company structure
  that reflects the characteristics of close
  corporations, as one of the available options.
• The law should establish a simple and easily
  maintained regime for not for profit companies.
• Co-operatives and Partnerships should not be
  addressed in the reformed company law.
• Flexibility
• Company law should provide for an appropriate
  diversity of corporate structures.
• The distinction between listed and unlisted
  company should be retained
• Corporate efficiency
• Company law should shift from a capital
  maintenance regime based on par value, to one
  based on solvency and liquidity.
• There should be clarification of board structures
  and director responsibilities, duties and
  liabilities.
• There should be a remedy to avoid locking in
  minority shareholders in inefficient companies.
• The mergers and takeovers regime should be
  reformed so that the law facilitates the creation
  of proper business combinations.
• The judicial management system for dealing with
  failing companies should be replaced by a more
  effective business rescue system.

7
Guiding Principles

• Transparency
• Company law should ensure the proper recognition
  of director accountability, and appropriate
  participation of other stakeholders.
• Public announcements, information and
  prospectuses should be subject to similar
  standards for truth and accuracy.
• The law should protect shareholder rights,
  advance shareholder activism, and provide
  enhanced protections for minority shareholders.
• Minimum accounting standards should be required
• Predictable Regulation
• Company law sanctions should be de-criminalized
  where possible.
• Company law should be enforced through
  appropriate bodies and mechanisms, either
  existing or newly introduced.
• Company law should strike a careful balance
  between adequate disclosure, in the interests of
  transparency, and over-regulation.

8
Process

• Policy process
• Discussion document published for comment,
  Nedlac process (Jun 2004)
• Workshops in 9 provinces engagement with
  government departments and regulators (Jun to
  Sept 2004)
• Policy document internally finalised (Jun 2005)
• Legislative drafting
• Drafting instructions prepared (March to June
  2005)
• Bill drafted chapter by chapter consultations
  with local and international experts on each
  chapter
• First complete draft put out for initial inputs
  from focus groups (Jul 2006)
• Additional meetings with NT and DoJ and inputs
  obtained from NT, DoJ, SARS, SARB, FSB, JSE, SRP
• Draft Bill finalised at end Oct 2006 and
  submitted to Cabinet
• Bill published for comment and introduced into
  Nedlac in February 2007

9
Scheme of the Bill

• The Bill has 9 Chapters and 5 Schedules
• Chapter 1 - Interpretation, Purpose and
  Application
• Chapter 2 - Formation and Registration of
  Companies
• Chapter 3 - Corporate Finance
• Chapter 4 - Corporate Governance and Financial
  Accountability
• Chapter 5 Takeovers, Offers and Fundamental
  Transactions
• Chapter 6 - Business Rescue
• Chapter 7 - Remedies and Enforcement
• Chapter 8 - Regulatory Agencies and
  Administration of the Act
• Chapter 9 - Offences, Miscellaneous Matters and
  General Provisions
• Schedule 1 Forms of Memorandum of Incorporation 
• Schedule 2 Members and Directors of Not For
  Profit Companies
• Schedule 3 Public Offerings of Shares and other
  Securities
• Schedule 4 Consequential Amendments 
• Schedule 5 Transitional Arrangements

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Purpose of the Bill

• The Long Title of the Bill states that the Bill
  aims
• To provide for the incorporation, registration,
  capitalization, organisation and management of
  for profit, and not for profit, companies
• To define the relationships between companies and
  their respective shareholders or members and
  directors
• To provide for equitable and efficient mergers,
  amalgamations and takeovers of companies, and for
  efficient rescue of failing companies
• To provide appropriate legal redress for
  investors and third parties with respect to
  companies
• To establish a Commission and a Takeover
  Regulation Panel to administer the requirements
  of the Act with respect to companies, and a
  Companies Ombud to facilitate alternative dispute
  resolution and to review of decisions of the
  Commission and the Takeover Regulation Panel, and
  a Financial Reporting Standards Council to advise
  on requirements for financial record keeping and
  reporting by companies
• Principally, the Act aims to repeal the
  Companies Act, 1973 (Act No. 61 of 1973) and
  provide for the future repeal of the Close
  Corporations Act, 1984 (Act No. 69 of 1984) and
  to provide for incidental matters.

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Chapter 1

• Interpretation, Purpose and Application
• Part A Interpretation
• Definitions
• Related and interrelated persons, and actions in
  concert
• Controlling and subsidiary relationships
• Solvency and liquidity test
• General Interpretation of the Act
• Part B Purpose and Application
• Act applies to all entities registered in terms
  of this Act or previously registered companies
• Limited application to not-for-profit companies
  (sec 10 and Schedule 2)
• Certain provisions do not apply to registered
  financial institutions
• Regulator may apply to Minister for exemption of
  provisions to industry

12
Chapter 1

• The transitional provisions set out in Schedule 5
  provide for -
• (a) the continuation of existing companies
  incorporated and registered in terms of the
  current Act, and provides for them to be governed
  henceforth in terms of the new proposed Act.
  Allowances are made for time for them to amend
  their articles to conform to the requirements of
  the new Act and
• (b) the conversion of existing or newly created
  close corporations into companies under the
  proposed new Act.

13
Chapter 1

• Chapter 1 introduces categories of companies as
  follows

For Profit Companies Not For Profit Companies
(a) Widely held Companies (b) Closely held Companies Successor to section 21 companies and are subject to - (i) a varied application of the Act, as set out in section 11 and (ii) a special set of fundamental rules, set out in section 12.
Public Interest Companies All widely held companies Closely held companies that meet turnover threshold and companies which are designated by Minister take deposits from public or exercise public trust have substantial impact on environment contribute to public health supply essential goods, services or infrastructure Public Interest Companies All widely held companies Closely held companies that meet turnover threshold and companies which are designated by Minister take deposits from public or exercise public trust have substantial impact on environment contribute to public health supply essential goods, services or infrastructure
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Chapter 2

• Formation and Registration of Companies
• Registration by right
• Minimal requirements lodge a Notice of
  Incorporation with Regulator
• Maximum flexibility in the design and structure
  of the company Memorandum of Incorporation is
  the sole governing document of the company.
• Memorandum of Incorporation
• certain specific requirements on the content
  specified
• number of default rules provided, but which may
  be changed if 90 of shareholders agree, but a
  company cannot fundamentally contract out of
  the proposed Act.
• Act will provide for the simplest possible form
  of incorporation by use of a standard form
  Memorandum of Incorporation, set out in Schedule
  1, which will permit the incorporators to accept
  the required provisions, and the default
  provisions without alteration.

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Chapter 2

• Formation and Registration of Companies
• Retains existing regime for company names (name
  reservation and registration), but name
  registration no longer compulsory. Company names
  only restricted to the extent necessary to
• protect the public from misleading names
• protect the interests of the owners of names and
  other forms of intellectual property and
• protect the society as a whole from names that
  are hateful or other negative nature.
• Chapter sets out requirements for registered
  office and form and location of company records
  and rights of shareholders to review information.
  

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Chapter 2
Old Company Law New Company Law
Name reservation compulsory Memo and articles of association must be lodged with registration Pre-incorporation contracts are complex Name approval process is complex Registration No is not acceptable as name Negation of defense of ultra vires Requires up to 7 persons to register a company Name reservation optional Memo of incorporation only governing doc does not have be lodged Pre-incorporation contracts simplified Name approval process simplified and clarified Registration No may be used as name Expanded negation of ultra vires defense Only 1 person required for For Profit and 3 persons for Not for Profit
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Chapter 3

• Corporate Finance
• Abolishes the nominal capital and par values
  (transitional measures in Schedule 5)
• Allows financial assistance for the purposes of
  share acquisitions subject to solvency and
  liquidity and shareholder resolution (to
  protect both creditors and shareholders)
• Outlines new general scheme for debentures
  designed to protect the interests of debentures
  holders without making unnecessary distinctions
  based on artificial categorization of the debt
  instrument they hold.
• Treats all distributions (e.g. share buy backs,
  dividends, redemptions, etc) in the same way by
  subjecting them to the solvency and liquidity
  test.
• Existing scheme for registration and transfer of
  uncertificated securities modified considering
  Securities Services Act.
• Simplified and modernised scheme for primary and
  secondary offering of securities to the public,
  based on the principles of the current Act.

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Chapter 4

• Corporate Governance and Financial Accountability
• Chapter retains most of the provisions found in
  the current law regarding corporate governance
  with important changes
• Quorum thresholds for passing an ordinary
  resolution 25 of all shares entitled to vote
• Allows shareholders to participate in meetings by
  electronic communication.
• Allows shareholders and directors to take binding
  decisions other than at a meeting.
• Sets out a codified regime of directors duties,
  which includes both a fiduciary duty, and a duty
  of reasonable care, which operate in tandem with
  existing common law duties.
• Supplemented by provisions addressing conflict of
  interest, and directors liability, indemnities
  and insurance
• Retains existing law with respect to financial
  records and statements, auditors, audit
  committees and company secretaries, but relieves
  closely held companies from the requirements of
  appointing auditors, unless they are also public
  interest companies as defined.

19
Chapter 5

• Takeovers, Offers and Fundamental Transactions
• Retains existing scheme largely (schemes of
  arrangement,mandatory offers, squeeze-out
  transactions, Takeover Code and Takeover
  Regulation Panel)
• Main changes
• Notification of share purchases
• Approval of fundamental transactions ( the
  disposal of substantially all of its assets or
  undertaking, a scheme of arrangement, or a merger
  or amalgamation) by a court only required if a
  significant minority opposed (at least 15) or if
  procedural irregularity or a manifestly unfair
  result found.
• Supported by a remedy of appraisal rights for
  dissenting minority shareholders.
• Introduces concepts of merger and amalgamation of
  companies

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Chapter 6

• Business Rescue
• Replaces the current judicial management with a
  modern business rescue regime, largely
  self-administered by the company, under
  independent supervision within constraints set
  out in the chapter, and subject to court
  intervention at any time on application by any of
  the stakeholders.
• Recognises the interests of shareholders,
  creditors and employees, and provides for their
  respective participation in the development and
  approval of a business rescue plan.
• Notably, the chapter protects the interests of
  workers by -
• recognising them as creditors of the company with
  a voting interest to the extent of any unpaid
  remuneration,
• requiring consultation with them in the
  development of the business rescue plan,
• permitting them an opportunity to address
  creditors before a vote on the plan, and
• according them, as a group, the right to buy out
  any dissenting creditor who has voted against
  approving a rescue plan.

21
Chapter 7

• Remedies and Enforcement
• High Court remains the principal forum for
  remedies
• Retains existing remedies, but introduces new
  remedies, including
• right to seek a declaratory order as to a
  shareholders rights
• right to apply to have a director declared
  delinquent or under probation
• Appraisal rights for dissenting shareholders to
  certain actions
• Right to commence or pursue legal action in the
  name of the company (common law derivative
  action)
• Establishes an extended right of standing to
  commence an action on behalf of an aggrieved
  person, and a regime to protect whistle blowers
  who disclose irregularities or contraventions of
  the Act..

22
Chapter 8

• Regulatory Agencies and Administration of Act
• Companies and Intellectual Property Commission
  (currently CIPRO dti)
• Registration, enforcement of law, education
• Takeover Regulation Panel (currently SRP)
• Approval of certain offers
• Financial Standards Reporting Council (same)
• Advice on reporting standards
• Companies Ombud (new)
• Resolution of shareholder disputes
• Appeal of administrative decisions

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Conclusion

• Anticipated impact of new law
• Reduce cost of registration and maintenance of
  companies
• Reduce regulatory burden for small medium-sized
  firms
• Improve transparency and accountability of public
  interest firms
• Improve regulatory oversight, enforcement and
  redress for shareholders, esp. minorities

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THANK YOU